The week
after the the Forum's report,
below, Representative Edward R. Royce (Republican,
39th District of California) sent a letter "as a senior member of the
House Financial Services Committee" asking the Chair of the SEC to "perform a
thorough review" of the Pershing Square plans, summarizing his concerns as
follows:

...It is my understanding that Pershing
Square has scheduled a shadow shareholder vote or referendum.
Pershing Square controls the timing, wording, and rules, yet it is
seeking an official seal of approval from the SEC for the vote.

I am unaware of any precedent for a
preliminary proxy statement filed under Schedule 14A being used in
this manner, and I am concerned that there are no rules in place
defining how a vote will occur, how votes will be counted and how a
final tally will be disclosed. The only rules that exist are those
described by Mr. Ackman's hedge fund in its filing. Additionally,
while the initial filing states that the vote will not be conducted
under the company's bylaws and charter, it does not disclose that it
is being conducted outside of Delaware state corporate law for a
shareholder meeting.

A printable copy of the
Congressman's May 27, 2014 letter can be downloaded here. A
responsive May 30, 2014 Forum letter providing the SEC with a copy
of its May 21 report (below) can be downloaded here, and the
July 2, 2014 SEC chair's reply is here.

For subsequent
reports of concerns raised by the activist proposal of a
shareholder-controlled "referendum," see

Last week’s
report of Pershing Square’s plan to conduct a “meeting of the
shareholders” of Allergan[1]
has stimulated fresh thinking about processes for investor exchanges of
views.

Shareholder
meetings conducted by one of the shareholders – as distinguished from
meetings conducted by the corporate issuer or by what the SEC defines as
an independent “moderator” such as the Shareholder Forum – had been common
a decade ago, used most notably by the activist Herbert Denton of
Providence Capital to attract investor support and media attention to his
proposals.[2]
The revived version, though, has some important differences:

▪

Pershing
Square is calling its meeting for what is presented as a formal voting
process conducted according to SEC rules,[3]
even though Pershing Square does not have the authority to act on
behalf of the issuer and the vote is not for any real corporate
action. Past examples of shareholder-hosted meetings were generally
presented as opportunities to hear and offer views, without any
references to voting-like processes.

▪

Pershing
Square has reported owning 9.7% of Allergan’s stock, making the
meeting host subject to SEC 13D requirements and suggesting careful
attention to Allergan’s 10% poison pill threshold. Past shareholder
hosts held relatively small positions in the subject company, allowing
most other investors to comfortably communicate with the host.

Some of the
issues that have been raised by this new variation are summarized below,
and your additional observations or questions will be welcomed.

While the
Forum does not address legal issues, it is important to note that lawyers
may be debating a couple of questions about the Pershing Square version of
a shareholder meeting:

1.

Will a participant trigger the poison pill?
According to some observers, the Pershing Square “Proxy Statement” has
been very carefully crafted to satisfy an exception to Allergan’s
poison pill definition of “an agreement, arrangement or understanding
to act together.” The exception is defined in a provision for “a
revocable proxy or consent given to such Person in response to a
public proxy or consent solicitation made pursuant to, and in
accordance with, Section 14(a) of the Exchange Act by means of a
solicitation statement filed on Schedule 14A).”[4]
Others may argue, though, that this provision does not apply since the
consent agreement between shareholders is not really “pursuant to” SEC
regulations for a proxy solicitation if there is no real issuer
meeting to be regulated.

2.

Does participation require SEC 13D reporting?
Considering the reported 9.7% beneficial ownership of the host, legal
advisors to investors must decide whether participating in the
“Meeting” could be viewed as “acting in concert.” There are of course
different types of participation to be considered, ranging from simply
attending and listening to the more active granting of authority for
“voting.” Even the simplest acceptance of an invitation to the
meeting, though, is complicated by Pershing Square’s statement that it
is asking shareholders for their agreement to support a “coordinated
and powerful” process intended to influence Allergan management.[5]
And since this process is not in fact a real issuer vote, securities
law experts will have to determine whether an investor can rely upon
SEC regulations applicable to voting.

The Forum
will of course report any determinations of these legal issues that may
interest Forum participants.

Most Forum
participants naturally support the expanded use of forum-type processes.
Whether the legal issues of the Pershing Square variation can be resolved
to allow practical investor participation or not, it has stimulated the
following constructive observations:

►

Opinion polling
– Many investors as well as corporate managers are enthusiastic about
using a quasi-voting process to survey investor views,[6]
since the recent proliferation of online survey tools has made it
impractical to get meaningful responses to conventional
questionnaires. The Pershing Square presentation of a simple vote for
or against its advocate-defined proposal, however, will not produce as
much information about investor views as a questionnaire designed for
that purpose.[7]
Opinion research professionals have also expressed concerns about
distortions resulting from higher participation rates by supporters of
the “Proposed Resolution” than by opposed or indifferent shareholders,
and by the absence of independent polling management to assure the
integrity of both participant privacy and reporting.

In
summary, Pershing Square’s use of a quasi-voting process may be a very
effective means of attracting attention to encourage meaningful levels
of shareholder response. Further refinements should be considered to
eliminate regulatory concerns and improve the quality of results.

►

Exchange of investor views
– Although the preliminary “Proxy Statement” does not present details
beyond bracketed spaces for future identification of a time and place,
it is assumed that the physical convening of the “Meeting” will
present opportunities for attendees to exchange views. The general design
of the Pershing Square process, however, appears to be focused almost
exclusively on the solicitation of support for its “Proposed
Resolution,” and in that context it may not be constructive to invite
debates and digressions.

It
may be assumed that the Pershing Square plan was not developed for the
purpose of providing an open exchange of investor views, but the legal
as well as access issues raised by this innovation should stimulate
thinking to improve both the old Denton model of shareholder-hosted
“town hall” meetings and the Forum model of independently moderated
meetings.

►

Supporting a petition
– Though presented in language to fit SEC regulations for proxy
voting, Pershing Square has actually presented a very innovative means
for shareholders to petition a company’s management. There are
of course many legal and administrative issues to be resolved, but
some refinement of this petitioning process could provide an effective
alternative to current practices relying upon shareholder submissions
of precatory proposals at annual meetings.

Pershing Square’s invention should be considered very broadly as a
possible foundation for “petitioning” in situations that justify
higher levels of attention.

♦ ♦ ♦

It should be
noted that the Forum has had no involvement in the Pershing Square plan
for an Allergan “Meeting.” As an observer, I thank those of you who have
offered views and invite continuing discussion of this innovation’s
potential applications to investor interests.

This Forum program is open, free of charge,
to anyone concerned with investor interests in the
development of marketplace standards for expanded access to
information for securities valuation and shareholder voting
decisions. As stated
in the posted
Conditions of Participation, the
Forum's purpose is to provide decision-makers with access to
information and a free exchange of views on the issues
presented in the program's Forum
Summary. Each
participant is expected to make independent use of
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without their explicit permission.

This Forum program was initiated to address
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support of several companies that can provide both expertise
and examples of leadership relating to the issues being
addressed.

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